In order to lower interest payout on borrowings, the leading general-use vehicle rental company Avis Budget Group Inc. (CAR) announced that it had closed a term loan worth $200 million. The term loan, which is scheduled to mature in 2019, bears an annual interest rate that is 200 basis points (bps) lower than the term loan it is paying off with the proceeds.
In order to pay off the $240 million of higher-interest loan (due in September 2018), Avis Budget will also need to use $40 million of available cash. As of December 31, 2011, the company has a floating rate term loan of $412 million due in September 2018, carrying an interest rate of LIBOR plus 500 bps. With this move, Avis Budget will save 200 bps of interest expenses annually while extending its debt maturities.
Moreover, the company announced that by utilizing $40 million of cash, along with earlier payments made towards repurchases of convertible bonds and redemption of senior notes, it has accomplished the target of paying $300 million of corporate debt in 2012.
Borrowing costs have gone down significantly, helping the companies to obtain easy financing at compelling prices. Corporate bonds and borrowings from banks are in high demand as the U.S. treasuries are yielding low rates.
Moreover, debt offerings of big companies are being oversubscribed, providing corporations the option to price offerings at lower rates. Hence, several companies are coming up with debt offerings to generate interest expense savings by refinancing outstanding borrowings.
Prior to this, Avis Budget closed its offering of 5-year $690 million Asset Backed bonds, carrying an interest rate of 2.2%. According to the company, the interest rate on the new ABS debt is the lowest since 2003. The proceeds from the offering will be used to refinance the outstanding ABS debt maturing in 2013 carrying an interest rate of approximately 5%.
The company, which competes with Hertz Global Holdings Inc. (HTZ), carries a Zacks #3 Rank signifying a short-term Hold rating. Moreover, we maintain a long-term Neutral recommendation on the stock.
Avis Budget Group is the leading vehicle rental company in North America, Australia and New Zealand. A network of more than 10,000 rental locations and 350,000 vehicles gives the company a well-established position in a highly competitive vehicle rental industry.
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